Question

Johnson Corporation purchased 100 percent ownership of Freelance Company at book value on March 3, 20X2. Johnson, which makes frequent inventory purchases from Freelance, uses the equity method in accounting for its investment in Freelance. Both companies are subject to 40 percent income tax rates and file separate tax returns.

Requireda. When will an inventory transfer cause consolidated income tax expense to be higher than the amount paid?b. When tax payments are higher than tax expense, how is the overpayment reported in the consolidated financial statements?c. What types of transfers other than inventory transfers will cause consolidated income tax expense to be less than income taxes paid?d. What types of transfers other than inventory transfers will cause consolidated income tax expense to be more than income taxes paid?